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Startup Rates Fall to Lowest Recorded Level

Courtney Rubin

Business Writers

The rate at which new businesses were born fell in 2010 to the lowest level on record, according to analysis from the U.S. Census Bureau.

The latest data, published this week, showed that startups as a percentage of all business fell below 8 percent in 2010, the latest year for which numbers are available. The rate has been falling steadily since peaking at 13 percent in the 1980s (13.02 percent in 1987, to be exact). It was just under 11 percent in 2006, and in 2010 it fell to 7.87 percent from 8.10 in 2009.

The figures are based on a survey conducted by the Census Bureau's Center for Economic Studies and the Ewing Marion Kauffman Foundation, a nonprofit organization that focuses on entrepreneurship.

A Drag on Jobs

The plummeting startup rate is bad news for the economy, which relies on them for job creation. From March 2009 to March 2010, U.S. private sector firms lost 1.8 million jobs. However, the 394,000 companies that opened their doors in 2010 created 2.3 million jobs at a time when the economy was anemic.

"Without the new jobs created by business startups, the Great Recession would have been even deeper, with many more jobs lost," said Robert E. Litan, vice president of research and policy at the Kauffman Foundation.

He added: "Unfortunately, new firm formation has waned since the 1980s, and the recession accelerated the decline. If we are to achieve and sustain a hearty recovery, policymakers, educators and organizations that help entrepreneurs commercialize their technologies must be willing to address every obstacle that stands in the way of new business formation."

Javier Mirada, principal economist at the Center for Economic Studies, told Reuters: "There are a lot of questions as to why the economy has been slow coming out of the recession, and it is possible that some of that could be explained by the decline in the trend of startups and new firms in the U.S. economy."

The Decline by Geography

Just over a third (35 percent) of all companies are "young"—in business five years or fewer—down from nearly 50 percent in the early 1980s.

Entrepreneurial firms' share of employment also fell: From 20 percent in the 1980s to just 12 percent in 2010.

The decline in startups was nationwide. The report does not analyze individual state activities, but it did show that state level drops were as high as 14 percent.

According to the report: "States that experienced the largest declines also were, for the most part, those in which young businesses had the highest initial shares of business activity in the 1980s. These states typically were in the West, Southwest and South—the regions hit hardest by the recession."

A separate Kauffman study released in March, which used 2011 data, showed that entrepreneurial activity decreased everywhere except in the Northeast. Even though the Western states had the sharpest decline, they still show the highest entrepreneurial activity rate. Arizona tops the list, with 520 per 100,000 adults creating businesses each month during 2011, followed by Texas (440 per 100,000 adults), California (440), Colorado (420) and Alaska, with 410 businesses started per 100,000 adults. The states with the lowest rates of entrepreneurial activity were West Virginia (150 per 100,000 adults), Pennsylvania (160) and Hawaii (180). Illinois, Indiana and Virginia all had 200 businesses created per 100,000 adults.

At the industry level, construction had the highest new-business birthrate of any field, with 1.68 percent of the total number of firms being startups in 2011. The next highest was the services industry, at 0.42 percent. Manufacturing was the lowest, with just 0.11 percent.